(Reuters) - Israeli Prime Minister Benjamin Netanyahu voiced support
on Tuesday for the first time for Palestinians to establish a
contiguous state, saying their future country should not look
like "Swiss cheese".

But only hours earlier, a ministerial committee in his right-wing
government granted Israeli legal status to three previously
unauthorized Jewish settlement outposts in the occupied West Bank,
drawing Palestinian and international criticism.

Palestinians fear such outposts and the 130 formal settlements Israel
has built in the territory it captured in a 1967 war will deny them a
viable state.

Asked on CNN´s Erin Burnett Outfront program whether he would accept
the Palestinians´ belief they should have a country that is
contiguous, Netanyahu replied: "Yes."

"Not as a Swiss cheese? No," Netanyahu added, addressing a key
Palestinian concern, that the state they seek would be comprised of
pockets of villages and towns surrounded by Israeli settlements.

Netanyahu previously has said Israel would be "generous about the
size" of a future Palestinian state, but he has not echoed U.S.
President Barack Obama´s call for a contiguous country to emerge from
Middle East peace talks - frozen since 2010 over the settlement issue

His change of tone on the nature of a Palestinian state came a week
after he received a letter from Palestinian President Mahmoud Abbas
that repeated a call for an end to all settlement activity and put
the onus on Israel to take action to get peace talks moving again.

Palestinians are awaiting a formal response to the letter.

In a statement before the CNN interview, Netanyahu´s office said the
ministerial panel "decided to formalize the status of the three
communities ... which were established in the 1990s following the
decisions of past governments".

Most of the international community views all Jewish settlements in
the West Bank as illegal. Israel distinguishes between settlements it
has approved and outposts which were never granted official
authorization.

Some 350 settlers live in the outposts whose status was changed --
Bruchin and Rechelim, both in the northern part of the West Bank and
Sansana to the south.

Netanyahu, though politically strong, has faced questions within his
own Likud party and other right-wing coalition partners about his
commitment to settlements, especially after police three weeks ago
evicted settlers from a building they said they had bought from a
Palestinian in the city of Hebron.

U.S. CONCERN

Israel´s main ally, the United States, voiced concern over the
decision on the outposts.

"We don´t think this is helpful to the process. We don´t accept the
legitimacy of continued settlement activity," State Department
spokeswoman Victoria Nuland said.

Nabil Abu Rdainah, a spokesman for Abbas, charged that "Netanyahu has
pushed things to a dead end yet again" and dismissed his nod for
a "contiguous" state that would mean removing some settlements
as "not enough".

Netanyahu, who partially froze building in Jewish settlements for 10
months two years ago to coax Palestinians back into negotiations, has
said the issue should be resolved in face-to-face talks.

For years, Israel has promised Washington it would remove dozens of
outposts but has done little to fulfill the pledge in the face of
domestic political pressure.

Peace Now, an Israeli anti-settlement group, said the change of the
three outposts´ status marked the first time since 1990 that the
Israeli government had established a new settlement, adding that the
four-man committee did not have the authority to approve the change.

An Israeli official disputed that view, saying the outposts had
effectively been approved by past governments but technical matters
delayed their legalization.

Separately, Netanyahu moved to patch up differences within his
coalition over the future of a neighborhood threatened with
demolition inside the West Bank settlement of Beit El.

One right-wing cabinet member cautioned the coalition could fall if
the homes were destroyed.

Israel has promised the Supreme Court, which is looking into
Palestinian claims of ownership to the land, that it will evict the
settlers in the disputed homes by May 1. Netanyahu said on Tuesday he
would ask the court to push back that deadline.

Some 500,000 Israelis live in the West Bank and East Jerusalem, also
captured in 1967. The two areas are home to 2.4 million Palestinians.